Rather Than Chase Bond Yields, Investors Can Focus on Dividends

Fixed income investors spooked by what’s happening in the bond markets may want to consider giving dividend-producing stocks a closer look. Ongoing inflationary pressure is looking to be persistent, making the case for alternate sources of income over bond yields — or is it?

As the Federal Reserve continues to tighten monetary policy, yields have been rising. Bond yields, in particular, are now challenging other sources of income, but yield chasing might not be the most effective way forward, according to a Barron’s article.

“As bond yields remained ultralow for many years, dividend stocks didn’t have a lot of competition for income investors’ attention,” the article says. “But now, as the Federal Reserve continues to raise interest rates and tighten monetary policy to fight raging inflation, the competitive landscape has changed dramatically and swiftly.”

Rising yields mean falling bond prices, making the case for dividend stocks that can weather the storm by offering a higher yield while not suffering from heavy price declines. Knowing where to look for these opportunities could lead investors to a path of dividend-focused exchange traded funds (ETFs).

“Investors, however, need to use caution before they start chasing fast-rising bond yields,” Barron’s cautions. “The 10-year U.S. Treasury note’s yield was shade below 3% this week, up from about 1.5% at the end of 2021. Bond yields and prices move in opposite directions—in this case, pressuring prices in various fixed-income classes such as high yield, investment-grade corporates, and municipals ahead of what’s expected to be more rate hikes and tightening by the Fed.”

High Dividends at a Low Cost

At a 0.06% expense ratio, fixed income investors can look to the Vanguard High Dividend Yield Index Fund ETF Shares (VYM) for high dividends at a low cost. The fund employs an indexing investment approach designed to track the performance of the FTSE High Dividend Yield Index, which consists of common stocks of companies that pay dividends that are generally higher than average.

The advisor attempts to replicate the target index by investing all, or substantially all, of their assets in the stocks that make up the index, holding each stock in approximately the same proportion as its weighting in the index.

In summary, VYM:

  • Seeks to track the performance of the FTSE® High Dividend Yield Index, which measures the investment return of common stocks of companies characterized by high dividend yields.
  • Provides a convenient way to track the performance of stocks that are forecasted to have above-average dividend yields.
  • Follows a passively managed, full-replication approach.

For more news, information, and strategy, visit the 
Fixed Income Channel.